- CFA Exams
- CFA Exam: Level I 2021
- Study Session 8. Financial Reporting and Analysis (3)
- Reading 28. Non-current (Long-term) Liabilities
- Subject 1. Accounting for Bond Issuance, Bond Amortization, Interest Expense, and Interest Payments
CFA Practice Question
A firm decides to issue zero-coupon debt rather than full-coupon debt. The effect on net income over the life of the debt is that interest on zero-coupon bond ______
B. falls each year and hence the net income decreases over the life of the debt.
C. falls each year and hence the net income increases over the life of the debt.
A. rises each year and hence the net income decreases over the life of the debt.
B. falls each year and hence the net income decreases over the life of the debt.
C. falls each year and hence the net income increases over the life of the debt.
Correct Answer: A
The effect on net income over the life of the debt is that interest on the zero-coupon bond rises each year and hence the net income decreases over the life of the debt.
User Contributed Comments 5
| User | Comment |
|---|---|
| Emily1119 | Can't get it. Why interest on zero-coupon bond rise each year? Thanks. |
| hoyleng | Zero coupon is issued at discount... |
| johntan1979 | It has the same effect as a discount bond, minus the coupon payments. |
| sshetty2 | i think it should say interest expense |
| khalifa92 | in this reading, you are doing bonds from the perspective of the borrower. |